Love it or hate it, few lawyers doubt that technology is fundamentally changing the profession through a seemingly endless stream of new products and features targeted to attorneys and clients alike. And while the ability to write software code is one dividing line between most lawyers and most legal startups, I’d argue that it isn’t the most important one. I think the biggest advantage these upstarts have is that they think in terms of products and features in the first place.
Yes, law is a “service industry,” and providing customer and client service is a big part of what we do. But just because our line of work requires individual effort to create value for our clients, that doesn’t mean that we shouldn’t think of ourselves as having products too. When we think ourselves as service providers, much of what we do seems customized (what Richard Susskind has called bespoke work). But as Susskind points out, most lawyers aren’t fashion designers, we’re tailors. We take components “off the rack” and help fit them to our particular client.
Thinking in terms of products helps you to analyze the features and effectiveness of each product individually. You can then run experiments on each product—perhaps adding or removing features or adjusting pricing—to learn how to influence your customers’ perception of value and how to improve your own business’s bottom line.
But to run experiments you first need to establish a baseline against which you can measure the successes or failures of your efforts.1 And the best metric for making apples-to-apples comparisons across your various offerings is profitability. Not just balance-sheet profitability. That is an important metric but is too high-level to help your shorter-term decision-making.
Matter-level profitability is a much better measurement because you can roll up your numbers across different segments (types of law, types of clients, times of the year, etc.) to give you a much more nuanced view of your practice. This, in turn, will give you actionable business intelligence that you can use to maximize your returns (and minimize your losses) consistently throughout the year. Quick note for the stereotypical math-phobic lawyer: a copy of the spreadsheet used in the example below is available here, but you’ll still want to read on for an explanation of how to use it.
Step 1: Acknowledge Your Current Product Lines and Calculate Top-Line Revenue for Each Product Separately.
Say you handle business formations but also do trademark registrations. Think of each as a separate product. Or say you do marriage dissolutions and also custody disputes: different products. You might even have different product lines within a single matter. The key is to track the revenue separately from various types of work so that you can start to see when patterns emerge for each.
Once you’ve identified some products (and don’t go crazy at first, you can always refine your model later), sketch out some features of each. What is the target audience? What is its pricing model? What is the problem each one is solving (or attempting to solve) for your client?2
Then, build a spreadsheet that you can use to track the gross revenue you generate from each product. It should look something like this:
Note that the calculation for Gross Revenue is simple, and is consistent with how you would think of revenue in a non-legal services context as well: Gross Revenue = Units Sold x Unit Price. To make more top-line revenue, you have exactly two options: increase your unit price or sell more units, both of which are ultimately a reflection of the attractiveness of your product in the marketplace.
Step 2: Assign Costs for Each Product/Matter
To do this, first recognize that there are two types of costs: direct and indirect. Direct costs are the easier of the two: any expense you incur in the course of bringing in revenue for a particular product is a direct cost. For purposes of this primer, we’ll ignore indirect costs for now.
For legal work, the biggest direct cost will probably be the salaries of the people (including you) who work on a matter. I find it helpful to break those salaries down to an hourly figure. If, for example, you assume your paralegal will perform client-facing work an average of 35 hours a week for 48 weeks a year, you’d divide their annual salary and benefits by 1680 hours to get an hourly cost basis.
Also included in your direct costs would be specific tools (like software) you use, subscriptions or other information sources you need to work on that product, and any expenses you take on for matters within a specific product line.3 In the example below, I’ve assumed only salary costs to keep the sheet manageable. Note that I’ve hidden columns D–G.
Step 3: Calculate Your Gross Margins and Roll Up Your Product Lines
Now you can calculate your gross profit, which is your gross revenue minus the direct costs for that revenue source. Right after that, compute your gross margin by dividing your gross profit by your gross revenue (typically expressed as a percentage).
And that’s it. In my example, you can see the basic formulas for increased profitability for each matter type. For hourly work, increased profitability comes from working your highest-priced resource (attorneys) for as much time as you can get away with (and still get the client to pay). For flat fees it is the opposite: work your lowest-cost resources for as little time as you can get away with (and still deliver quality work).
Of course, these examples are intentionally rough, but even this most simple calculation can offer tremendous insight, and it is probably more analysis than your competitors are doing. In future posts, I’ll explore how to experiment with the features of your products to increase profitability, but for now try to get in the habit of tracking these numbers. Sometimes just looking at the right thing will help you see how to improve it.
Working through a Business Model Canvas for each product can help you get the answers to these questions. A Business Model Canvas can help you create a one-page business model framework that helps you uncover customer problems and propose solutions to those problems rather than just building service offerings. ↩
This is true even if you charge those expenses to the client–expense reimbursements would then be an additional component to your gross revenue. ↩